Benchmark indices fell over 1% on Wednesday, losing for seventh straight session after army conducted operation along India-Myanmar border. The BSE Sensex
settled at a 3-month low while the broader Nifty50 index ended at 1.5 month low ahead of the September F&O expiry.
Investors were also on edge after rupee sank to a more than six-month low on foreign fund outflows.
The sentiment was also dampened after a Reuters poll said that the Reserve Bank of India will hold policy steady at its October 4 meeting, and well past next year, amid weak economic growth and signs inflation may soon overshoot its target.
The latest poll of 60 economists showed although the RBI will hold its key repo rate at a seven-year low of 6 percent next week, it will downgrade its growth forecast again following disruptions caused by GST.
In August, despite a neutral policy bias, India's central bank cut the key policy rate after lowering its economic growth forecast in June to 7.3% from 7.4% for the current fiscal year.
Expectations of a rate hike by the US Federal Reserve
and lingering North Korean worries also dented risk appetite.
Foreign investors have net sold $777 million worth of Indian shares so far this month. They sold nearly $2 billion worth of equities in August as stretched valuations and simmering North Korea
tensions saw foreign investors pulling out.
The US Federal Reserve
last week reiterated it would continue gradually raising interest rates, including once more this year.